The Performance of Private Unit Trusts in Malaysia

Abstract

As investments in the Malaysian capital market become
institutionalised, unit trusts are increasingly becoming the main vehicle
for a retail investor to participate in the capital market. Unit Trusts are
originally promoted to generate stable income with reasonable risks for
medium to long term investors.
This study examines the performance of 27 unit trusts in
Malaysia.Monthly data were collected over a 8 year period from 1990
to 1997. Performance is measured by the returns earned by the Unit
Trust. However these returns must commensurate with the level of risk
and therefore risk-adjusted performance measures are used .
Performance evaluation is further refined by investigating the ability of the Unit Trust manager to select correct investments at the right time
i.e. his/her timing and selection performance.
The general findings of this study indicate that most Malaysian
Unit Trusts generally under perform the market, are poorly diversified
and generate low levels of returns, of the 27 funds studied only 33%
outperformed the market. However after adjusting for different risk
levels, none of the funds were able to outperform the market. The
average R2 was 0.516 indicating most funds were not fully diversified.
Specifically most funds analysed attained half the level of
diversification compared to the market portfolio which is used as the
benchmark portfolio
The findings indicate that funds generally perform better during
a bear market as compared to a bull market. Though the returns for
unit trusts in a down trending period was negative, the losses were less
than the market portfolio, whereas in an uptrend period the returns of
unit trusts were less than the market return.
The findings also indicate that the timing and selection ability of
Unit Trust managers were poor with all funds having negative net selection. Timing ability was only marginally positive for income growth
funds.
This implies that in terms of the performance measured on the
basis of returns per unit of risk and the level of diversification achieved
by these funds, it would have been better for investors to invest on their own.